Corporate Misconduct and the Cost of Private Debt: Evidence from China

Xian Gu (), Iftekhar Hasan and Haitian Lu ()
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Xian Gu: Central University of Finance and Economics
Haitian Lu: Hong Kong Polytechnic University

Comparative Economic Studies, 2019, vol. 61, issue 3, No 5, 443-463

Abstract: Abstract Using a comprehensive dataset of corporate lawsuits in China, we investigate the implications of corporate misconduct on the cost of private debt. Evidence reveals that firms involved in litigations obtain subsequent loans with stricter pricing terms, 15.1 percent higher loan spreads, than non-litigated borrowers. Strong political connection and repeated relationship help to flatten the sensitivity of loan pricing to litigation. Nonbank financial institutions react in stronger manner to corporate misconduct than traditional banks in pricing loans. Overall, we show that private debt holders care about borrowers’ wrongdoing in the past.

Keywords: Litigation; Loan spreads; Political connection; Relationship (search for similar items in EconPapers)
JEL-codes: G12 G14 L14 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1057/s41294-019-00099-8

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